Global equity markets continued to retreat on Monday as further evidence of the impact of the financial crisis on corporate profits outweighed slightly better than forecast US retail sales data.
The weekend meeting of the Group of Seven leading industrialised nations in Washington initially provided support for the dollar, although the US currency’s rebound proved short-lived.
There was further disappointment on the corporate earnings front on both sides of the Atlantic.
In the US, Wachovia reported a surprise first-quarter loss, slashed its dividend and said it planned job cuts. The bank also said it planned to raise $7bn to bolster its balance sheet.
Meanwhile, Dutch conglomerate Philips unveiled a steep drop in first-quarter profits and warned of slowing growth in mature markets due to the credit crunch.
The grim results came hard on the heels of Friday’s dire figures from US industrial bellwether General Electric and data showing that US consumer confidence had slumped to a 26-year low.
Peter Dixon, economist at Commerzbank, noted that GE’s figures came just a day after US retailer Wal-Mart increased its first-quarter earnings estimate, raising the question of whether the US consumer was in as much trouble as had been feared.
“One interpretation of the Wal-Mart figures is that since consumers are finding their income squeezed by rising food and energy prices, they are switching to cheaper alternatives for basic purchases,” Mr Dixon said.
The theme of uncertainty continued on Monday as figures showed that headline US retail sales unexpectedly rose 0.2 per cent last month – against expectations of an unchanged reading – with sales excluding autos edging up 0.1 per cent.
But Julian Jessop at Capital Economics said the fact that the data beat the markets’ low expectations should not distract from the bigger picture.
“Consumer spending is already soft, and the slump in consumer confidence suggests it will weaken further,” Mr Jessop said.
“Equity markets are probably right to expect the US to recover in the second half of the year, but this faith is not yet shared by the very people who will have to do the spending to lift the economy out of recession.”
There was little sign on Monday of equity markets recovering from last week’s sell-off. In New York, the S&P 500 index closed 0.3 per cent lower and the Nasdaq Composite lost 0.6 per cent. The pan-European FTSE Eurofirst 300 fell 0.8 per cent.
Asian stocks suffered deeper losses as investors got their first chance to react to GE’s figures. In Tokyo, the Nikkei 225 fell 3.1 per cent and Hong Kong shed 3.5 per cent. In Shanghai, the Composite index tumbled 5.6 per cent as property stocks were hit by concerns that the authorities might move to curb rising real estate prices.
Government bonds were mixed. The yield on the 10-year Treasury was up 4bp at 3.51 per cent and the 10-year Bund yield was down 3bp at 3.89 per cent.
The steep slide in Tokyo stocks sent the 10-year Japanese government bond down 4bp to 1.33 per cent.
On the currency markets, the dollar gave back an early advance as concerns about the US economic outlook offset the weekend’s G7 communiqué, which expr-essed concern about recent sharp movements in major currencies and their implications for economic and financial stability.
“The mild tone of the statement suggests that G7 is not ready for dollar intervention at this stage,” said Goldman Sachs.
“Nevertheless, the change in the statement does provide some clarification that we are getting closer to a situation where dollar weakness becomes undesirable for the G7 and where co-ordinated intervention becomes a real possibility.”
In commodities, the benchmark US oil price closed at a record high of $111.76 a barrel, up $1.62, and was near last week’s intra-day high of $112.21 amid concerns about supply disruptions.
Gold recovered from an early decline as the dollar relinquished an early advance.
There were signs of continued stress in the money markets, with three-month sterling and euro Libor rates edging up, the latter to its highest level since December 27.
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